Persimmon Appears To be Building a Strong Earnings Recovery

The U.S. homebuilders may have grabbed the spotlight this year, but their British counterpart, Persimmon PLC, also has fared well and is likely to post a positive earnings surprise when it wraps up the year.

One of the big stories in U.S. financial markets this year has been the revival of the real estate industry and the dramatic outperformance of several of the strongest homebuilding stocks. As home prices have increased in value in the United States over the last year, rising from a median value of $151,500 in February to $181,000 by September, a number of the top-performing homebuilders have seen their stock prices nearly double. In the United Kingdom, where real estate prices also tumbled during the 2008/2009 mortgage lending crisis and the broader financial panic, this decline was more muted, and the British industry’s recovery also has taken place at a more steady rate. Britain’s home builders may have suffered less from the mortgage crisis than their peers in the U.S., but some of them, such as Persimmon PLC (PSMMF.PK) are joining their American counterparts in reaping the benefits of the increase in house prices over the last three years.

Analysts have been raising their estimates for Persimmon’s earnings in the wake of the industry-wide improvement. Only three months ago, the consensus forecast by analysts called for Persimmon to report full year earnings of 48 pence a share; today, that figure stands at 51 pence a share. The company has a Predicted Surprise of 2.6%, indicating that the latest estimates by top-ranked analysts are coming in at levels even higher than the consensus. Over the course of the last six months, every analyst to have updated his or her estimates has boosted the target, indicating a widespread level of bullishness. That optimism isn’t confined only to profits: analysts also are expecting revenue and EBITDA levels to be higher than they previously expected, a trend reflected in the revision pattern over the last 90 days.

Persimmon plans to pay a dividend of 75 pence a share in June 2013, a payout which amounts to a 9% dividend rate. The company is likely to follow through on that dividend pledge, thanks to its ability to generate hefty amounts of cash over the last year. Persimmon has had no debt on its balance sheet since last year, when it paid off its long-term loans. When it reported its half-year results on August 21, 2012, it had £131 million in cash and equivalents on its balance sheet, and – despite the fact that it has continued to acquire new land holdings it generated free cash flow of £111 in that period.

Although mortgage lending is still tight, the fact that home prices should help drive earnings higher for some time to come, along with Persimmon’s opportunistic purchases of inexpensive land. During the company’s most recent conference call to discuss earnings, Mike Farely, Persimmon’s chief executive, noted that operating margin has climbed to 12.2%, “a full 3.2% increase since this time last year.” The chart below shows the recovery in the operating profit margins since the lows of 2009/2010, illustrating just why it seems likely to analysts that the company will report stronger earnings going forward.

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